Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/49517
Authors: 
Bauer, Christian
Davies, Ronald B.
Haufler, Andreas
Year of Publication: 
2011
Series/Report no.: 
CESifo working paper: Public Finance 3566
Abstract: 
We study the optimal combination of corporate tax rate and tax base in a model of a small open economy with heterogeneous firms. We show that it is optimal for the small country's government to effectively subsidize capital inputs by granting a tax allowance in excess of the true costs of capital. Economic integration reduces the optimal capital subsidy and drives low-productivity firms from the small country's home market, replacing them with high-productivity exporters from abroad. This endogenous policy response creates a selection effect that increases the average productivity of home firms when trade barriers fall, in addition to the well-known direct effects.
Subjects: 
corporate tax reform
trade liberalization
firm heterogeneity
JEL: 
H25
H87
F15
Document Type: 
Working Paper

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